As representatives of high-tax states, you are
acutely aware of the importance of the state and local tax deduction, otherwise
known as the SALT deduction. Unfortunately, your colleagues on the House Ways
and Means Committee have proposed the elimination and, most recently, capping
of the SALT deduction despite the valiant efforts of many of you to save it or
keep it in its current form. In fact, some committee members of low-tax states
have openly suggested that the SALT deduction be eliminated to punish states
that are operated inefficiently or expensively, without any appreciation of or
regard for the extraordinary demands imposed on dense, urbanized states,
particularly “blue” states. Likewise, Treasury Secretary Steve Mnuchin’s
rationale for eliminating the SALT deduction is that the federal tax code needs
to “stop subsidizing states.”

Sadly, these opponents of the SALT deduction
have yet to realize that their constituents also rely on this deduction.
According to Internal Revenue Service data from 2015, the SALT deduction was
taken by 42.5 million tax filers, or 95 percent of the roughly 44.7 million
taxpayers who itemize deductions. In other words, this is not a high-tax state
vs. low-tax state or blue state vs. red state battle.

When individual taxpayers across America file
their federal income tax returns each year, they have the choice of taking a
standard deduction or itemizing a number of different available deductions.
This choice usually comes down to a host of different factors, such as income level,
whether the taxpayer owns or rents property, how the taxpayer earned the income
and what other types of expenses the taxpayer has incurred in trying to earn
his or her income, among other items. If the taxpayer chooses to itemize
deductions, one of the most common deductions is the SALT deduction. That’s
true in every region of the country.

Still, there is no doubt that the SALT
deduction provides a much more significant federal tax benefit for those living
in high property tax and/or high income tax states. But there is also no doubt
that American taxpayers living in these jurisdictions shoulder a
disproportionate share of societal costs, often because the amount of federal
tax dollars flowing back to these states is not anywhere close to the amount sent
to Washington, D.C. — causing state and local taxes to make up the shortfall.
For instance, in our home state of New Jersey, residents paid into the U.S.
Treasury $3,748 per person more than they received from the federal government.
To put it another way, New Jersey received 74 cents from Washington for each
dollar paid in federal taxes — the lowest ratio of any state in the country. At
the other extreme, South Carolina receives $7.87 back from Washington for every
dollar its residents pay in federal tax. New Jersey would be a low-cost state,
too, if it were to receive $7.87 instead of 74 cents per person! Finally, bear
in mind, also, that a deduction is not a dollar-for-dollar reduction to tax
due; it merely reduces taxable income.

So, what should you do if you are unable to
muster the necessary votes to save the SALT deduction? Without attempting to
weigh in on the political debate, we are offer a slight compromise that (1)
should make tax code simplification advocates happy, (2) appease the interests
of those in Congress who represent the taxpayers living in high-tax states,
such as California, Connecticut, New York and New Jersey, and (3) reduce the
cost of the current SALT deduction to the federal government, which has been
estimated at $351 billion:

• Adjust
the personal exemption and standard deduction provided in the Code to reflect
the consumer price index by geographic region;

• Multiply
the resulting standard deduction by a ratio or multiplier that takes into
account a given state’s SALT burden; and

• Begin
gradual phase-out of the personal exemption and standard deduction in this
proposal, beginning at taxable income in excess of $375,000 and to be
completely phased out at taxable income of $700,000 or higher.

Adjusting the standard deduction as well as the
personal exemption to reflect the consumer price index by region/state allows
for the greater costs of goods and services in various parts of the country to
be reflected in the amount of tax relief taxpayers living in these areas can
receive. Currently, the Bureau of Labor Statistics publishes monthly consumer
price index data by state and by regions in a given state. Under this proposal,
the Internal Revenue Service could extrapolate a yearly average from this data
to provide in tables for practitioners to use in calculating and reporting
personal income taxes by state or by specific areas if applicable.

The next component of this proposal deals with
state and local taxes directly. While our plan accedes to the wishes of those
seeking to eliminate the SALT deduction, the elimination of any tax savings
afforded to personal income tax filers for their property tax and income taxes
would be draconian and unfair. To select one state or local tax as being
deductible versus others will inevitably discriminate against a class or
classes of taxpayers. A better solution is to offer some form of tax relief to
reflect a taxpayer’s state and local tax burden that does not choose between
tax types or regions. Under this proposal, the standard deduction would be
multiplied by a ratio that ranges from 1-2. The median state income, sales and
property tax data for each state could be collected and analyzed to determine
where on the ratio the state falls. States with low tax burdens would have a
ratio of 1 or close to 1, and states with higher burdens would have a ratio
closer to 2. The resulting ratio would be applied to increase the standard
deduction.

For example, let’s consider a Florida-based
married couple filing a joint return with a standard deduction of $12,700.
Since Florida does not have an income tax, it may have a lower ratio, say
1.256. When computing the available standard deduction, the couple would
multiply $12,700 by the 1.256 to arrive at a total standard deduction of
$15,951.20.

The elegance of this approach lies in its
simplicity as well as past precedent. The Internal Revenue Code already
provides for adjusting a number of provisions to reflect consumer price index,
such as tax brackets and personal exemptions, to name a few. This proposal
would simply require more regional data to be used. In relation to SALT, the
above multiplier mechanism should reduce the overall cost and will also be
subject to an income phase-out as well.

In considering the different opinions and
analyses being offered for keeping or eliminating the SALT deduction, our
approach seems to address most if not all of the different contentions and
concerns being expressed by your congressional colleagues. In the interest of
tax fairness, we strongly urge you to take up this alternative with members of
the House Ways and Means Committee before they take a much cruder knife to the
tax code and hurt all states in the process.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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